Financial Accounting First Canadian Edition Canadian 1st Edition Waybright Test Bank Download

Chapter 6 Test Item File Waybright/Chen/Pyper, Financial Accounting, Ce
Financial Accounting First Canadian Edition

Canadian 1st Edition Waybright
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Financial Accounting (Waybright)
Chapter 6 Inventory
6.1 Describe the three different inventory costing methods
1) Merchandise inventory represents the goods that a merchandiser has available to sell to its customers.
Answer: TRUE
Diff: 1 Type: TF
LO: 6-1 Describe the three different inventory costing methods
Skills: Concept
Blooms: Knowledge
CFALO: A-9 Explain and apply inventory costing methods
2) Merchandising companies can be either wholesalers or retailers.

Answer: TRUE
Diff: 1 Type: TF
Skills: Concept
Blooms: Knowledge
3) Manufacturers generally purchase large amounts of products from wholesalers and resell them to retailers.
Answer: FALSE
Diff: 1 Type: TF
Skills: Concept
Blooms: Knowledge
4) GAAP allows two different kinds of inventory costing methods.

Answer: FALSE
Diff: 1 Type: TF
Skills: Concept
Blooms: Knowledge
1
Copyright © 2013 Pearson Canada Inc.
5) Under the specific-identification method, the flow of goods through the accounting records will:
A) be the opposite of the physical flow of goods through the business.
B) closely match the physical flow of goods through the business.
C) exactly match the physical flow of goods through the business.
D) have no relationship to the physical flow of goods through the business.
E) sometimes match the physical flow of goods through the business.
Answer: C
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
6) Under the FIFO method, the flow of goods through the accounting records will:
A) be nearly the opposite of the physical flow of goods through the business.
Answer: B
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
7) Under the average cost method, the flow of goods through the accounting records will:
A) be the opposite of the physical flow of goods through the business.
Answer: D
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
2
8) An inventory layer is synonymous with a separate:

A) sale of merchandise.
B) purchase of merchandise.
C) return of merchandise.
D) customer return of merchandise.
E) discount of goods from the supplier.
Answer: B
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
9) An accounting department only needs to know:

A) how many units were sold, not which units were sold.
B) which units were sold, not how many units were sold.
C) the specific price of a specific unit.
D) the average price of a specific unit.
E) the physical flow of goods.
Answer: A
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
10) Cost of goods sold may include all of the following EXCEPT for:
A) the actual cost of the item.
B) shipping costs.
C) insurance.
D) management salaries.
E) the cost to make the item.
Answer: D
Diff: 1 Type: MC
Skills: Application
Blooms: Application
11) A manufacturer uses __________ inventory to produce the goods it sells.

Answer: raw materials
Diff: 1 Type: SA
Skills: Recall
Blooms: Knowledge
3
12) The inventory system that uses the merchandise inventory account as an active account is called:
Answer: perpetual system.
Diff: 1 Type: SA
Skills: Concept
Blooms: Knowledge
13) What does a manufacturer's goods available for sell represent?

Answer: finished goods inventory
Diff: 1 Type: SA
Skills: Application
Blooms: Application
14) Which method of valuing inventory is based on the average of units?

Answer: average cost method
Diff: 1 Type: SA
Skills: Concept
Blooms: Knowledge
15) What is the method of valuing inventory that is based on the costs for each individual item?
Answer: specific cost method
Diff: 1 Type: SA
Skills: Concept
Blooms: Knowledge
16) What is the method of valuing inventory that is based on the assumption that the oldest goods will be
sold first?
Answer: FIFO method
Diff: 1 Type: SA
Skills: Concept
Blooms: Knowledge
17) Goods such as milk, bread, and cheese would probably be costed using what method?
Answer: FIFO method
Diff: 2 Type: SA
Skills: Application
Blooms: Application
4
18) A new car lot would probably cost its inventory using what method?
Answer: specific-identification method
Diff: 2 Type: SA
Skills: Application
Blooms: Application
19) The inventory system whereby the merchandise inventory account balance is merely a record of the most
recent physical inventory count is called the:
Answer: FIFO system.
Diff: 1 Type: SA
Skills: Concept
Blooms: Knowledge
6.2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost methods
and journalize inventory transactions
1) Beginning inventory plus net purchases equals cost of goods sold.

Answer: FALSE
Diff: 1 Type: TF
LO: 6-2 Compute inventory costs using specific-identification; first-in, first-out (FIFO); and average cost
methods and journalize inventory transactions
Skills: Recall
Blooms: Knowledge
2) A piece of artwork would probably be inventoried using the specific-identification method.

Answer: TRUE
Diff: 1 Type: TF
Skills: Application
Blooms: Application
3) The objective of inventory tracking is to allocate the cost of goods available for sale between the cost of units
sold and the cost of unsold inventory.
Answer: TRUE
Diff: 1 Type: TF
Skills: Recall
Blooms: Knowledge
5
4) Cost of goods sold is shown on the:

A) balance sheet as an asset.
B) income statement before gross profit.
C) statement of retained earnings.
D) income statement after gross profit.
E) balance sheet as a liability.
Answer: B
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
5) Inventory is shown on the:

A) balance sheet as an asset.
B) income statement before gross profit.
C) statement of retained earnings.
D) income statement after gross profit.
E) balance sheet as a long-term asset.
Answer: A
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
6) The amount of cost of goods sold is MOST influenced by the:

A) cost of the items sold.
B) cost of the unsold items.
C) inventory method used.
D) number of items sold.
E) the physical flow of inventory.
Answer: C
Diff: 2 Type: MC
Skills: Critical Thinking
Blooms: Comprehension
6
7) The LEAST widely used of the inventory valuation methods is:

A) FIFO.
B) perpetual system.
C) average cost.
D) specific-identification.
E) periodic system.
Answer: D
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
8) Brandon Company has the following list of inventory:
Item Unit Cost Selling Price

DKW $13,257 $20,322
EOR $6,790 $7,192
CKS $18,302 $19,773
XCC $9,394 $11,274
CIS $27,434 $33,409
Under specific-identification, what is Brandon's ending inventory if EOR and CIS are not sold during the
current period?
Answer: $34,224
Diff: 3 Type: SA
Skills: Application
Blooms: Application
7
9) Isaiah Sporting Goods uses the perpetual average cost method of determining inventory costs.
Below is the inventory record for Product C124.
Date Received Sold Cost/Unit Total Cost

April 22 534 $6.58 $3,513.72
May 17 433 $6.70 $2,901.10
June 21 389 $6.76 $2,629.64
August 2 436 $6.44 $2,807.84
What is the average cost per unit after the receipt of the June 21 inventory?
Answer: $6.67
Calculation: (3513.72 + 2901.10 + 2629.64)/(534 + 433 + 389)

Diff: 3 Type: SA
Skills: Application
Blooms: Application
10) Brandon Company has the following list of inventory:
Item Unit Cost Selling Price

DKW $13,257 $20,322
EOR $6,790 $7,192
CKS $18,302 $19,773
XCC $9,394 $11,274
CIS $27,434 $33,409
Under specific-identification, what is Brandon's cost of goods sold if EOR and CIS were not sold during the
current period?
Answer: $40,953
Diff: 3 Type: SA
Skills: Application
Blooms: Application
8
11) Rick Company’s beginning inventory and purchases during the fiscal year ended December 31, 2012 were
as follows: (NOTE: The company uses a perpetual system of inventory.)
Units Unit Price Total Cost

January 1–Beginning inventory 18 $24 $432
March 12–Sold 13
April 11–Purchase 45 $29 $1,305
June 20–Sold 33
Aug 16–Purchase 35 $27 $945
Sept 11–Sold 29
Total Cost of Inventory
Ending inventory is 23 units.
$2,682
What is the ending inventory of Rick Company for 2012 using FIFO?
Answer: $621 (23 x $27 = $621)
Diff: 2 Type: SA
Skills: Application
Blooms: Application
12) Casey Company’s beginning inventory and purchases during the fiscal year ended December 31, 2012 were

March 8–Sold 14
April 2–Purchase 30 $13 $390
June 5–Sold 25
Sept 11–Sold 22
Total Cost of Inventory $980
Ending inventory is 14 units.
What is the ending inventory of Casey Company for 2012 using FIFO?
Answer: $196
Calculation: There are 14 items left out of the second purchase (14 x $14 = $196)
Diff: 3 Type: SA
Skills: Application
Blooms: Application
9
13) Prepare the journal entries to record the cost of an item for $28 that sold for $40 cash under the perpetual
inventory method.
Answer: Debit Cost of Goods Sold $28; Credit Inventory, $28
Debit Cash $40; Credit Sales $40

Diff: 2 Type: ES
Skills: Application
Blooms: Application
14) Prepare the journal entry to record the purchase of $7,400 of inventory on account under the perpetual
inventory method.
Answer: Debit Inventory, $7,400; Credit Accounts Payable, $7,400
Diff: 2 Type: ES
Skills: Application
Blooms: Application
15) When merchandise is sold and the perpetual system of inventory is used, the journal entry to record a
sale of merchandise on account would include:
Answer: Debit Accounts Receivable; Credit Sales.
Debit Cost of Goods Sold; Credit Inventory.
Diff: 2 Type: ES
Skills: Application
Blooms: Application
10
16) Rick Company’s beginning inventory and purchases during the fiscal year ended December 31, 2012 were

March 12–Sold 13
April 11–Purchase 45 $29 $1,305
June 20–Sold 33
Sept 11–Sold 29
Total Cost of Inventory
Ending inventory is 23 units. $2,682
What is the cost of goods sold for Rick Company for 2012 using FIFO showing detailed calculations.
Answer: $2,061
Calculations:
A. Sold 13 out of the beginning inventory of 18 (13 x $24 = $312)
B. Sold the remaining 5 of the beginning inventory of 18 (5 x $24 = $120)
C. Sold 28 out of the first purchase of 45 (28 x $29 = $812)
D. Sold the remaining 17 of the first purchase of 45 (17 x $29 = $493)
E. Sold 12 out of the second purchase of 35 (12 x $27 = $324)
Diff: 3 Type: ES
Skills: Application
Blooms: Application
17) Journalize the following transactions using the perpetual inventory method.
June 11 Purchased $6,700 of merchandise on account, terms 4/10, n/45.
June 14 Returned $990 of merchandise that was damaged for credit.
June 18 Paid balance of account from purchase of June 11.
Answer:
Date Description PR Debit Credit
June 11 Inventory $6,700
Accounts Payable $6,700
June 14 Accounts Payable $990

Inventory $990
June 18 Accounts Payable $5,710

Inventory $228.40
Cash $5,481.60
11
Diff: 2 Type: ES
Skills: Application
Blooms: Application
18) Journalize the following inventory transactions using the perpetual inventory method.
April 17 Purchased $4,800 of inventory, on account, terms 2/10, n/30.

April 22 Returned $750 of damaged merchandise to supplier.
April 25 Paid balance due on inventory purchase of April 17.
Answer:
Date Description PR Debit Credit
April 17 Inventory 4,800
Accounts Payable 4,800
April 22 Accounts Payable 750

Inventory 750
April 25 Accounts Payable 4,050

Inventory 81
Cash 3,969
Diff: 2 Type: SA
Skills: Application
Blooms: Application
6.3 Compare the effects of the different costing methods on the financial statements
1) The choice of inventory costing method does not have an effect on net income.
Answer: FALSE
Diff: 1 Type: TF
LO: 6-3 Compare the effects of the different costing methods on the financial statements
Skills: Concept
Blooms: Knowledge
12
2) In periods of ricing prices, the average cost method generates gross profit, net income, and income tax
amounts that fall below the FIFO method.
Answer: TRUE
Diff: 2 Type: TF
Skills: Application
Blooms: Application
3) In order to pay the least income tax possible in periods of decreasing inventory costs, the company should
use which of the following inventory costing methods?
A) FIFO
B) Perpetual
C) Average cost
D) Specific identification
E) Periodic
Answer: A
Diff: 2 Type: MC
Skills: Application
Blooms: Application
4) In order to pay the least income tax possible in periods of constant costs, the company should use which of
the following inventory costing methods?
A) FIFO
B) Perpetual
C) Average cost
D) Periodic
E) Any method, as constant costs have no effect on net income or taxes for the period
Answer: E
Diff: 2 Type: MC
Skills: Recall
Blooms: Knowledge
13
5) ________ helps investors compare a company's financial statements from one period to the next.
A) Reliability
B) Consistency
C) Objectivity
D) Entity
E) Comparability
Answer: B
Diff: 2 Type: MC
Skills: Recall
Blooms: Knowledge
6) Consistency is mandated by:

A) CRA.
B) the OSC.
C) IFRS and Canadian ASPE.
D) the federal government.
E) the provincial government.
Answer: C
Diff: 2 Type: MC
Skills: Recall
Blooms: Knowledge
7) In order to attract investors and borrow on attractive terms, what method would a company use in times when
inventory costs are rising?
Answer: FIFO
Diff: 2 Type: SA
Skills: Application
Blooms: Application
8) What is the most popular inventory costing method?

Answer: FIFO
Diff: 1 Type: SA
Skills: Recall
Blooms: Knowledge
14
9) __________ produces the lowest cost of goods sold and the highest gross profit when prices are increasing.
Answer: FIFO
Diff: 1 Type: SA
Skills: Concept
Blooms: Knowledge
10) If a company wants a "middle ground" solution to net income and the amount of income taxes that the
company will pay, what method would they use to value their inventory?
Answer: Average cost
Diff: 2 Type: SA
Skills: Concept
11) Which method produces the lowest cost of goods sold and the highest gross profit when prices are
increasing?
Answer: FIFO
Diff: 2 Type: SA
Skills: Application
Blooms: Application
12) In order to pay the least income tax possible in periods of rising inventory costs, which inventory costing
method should the company use?
Answer: FIFO
Diff: 2 Type: SA
Skills: Application
Blooms: Application
13) When inventory prices are rising, what is the effect on Inventory, Cost of Goods Sold, and Net Income
under the FIFO method?
Answer: FIFO results in the highest ending inventory value, the lowest Cost of Goods Sold, and the highest Net
Income under rising prices..
Diff: 2 Type: ES
Blooms: Evaluation
15
14) What are the benefits of using FIFO?

Answer: FIFO most closely matches the flow of goods and maximizes net income when inventory prices rise.
Diff: 2 Type: ES
Skills: Recall
Blooms: Knowledge
15) What are the benefits of using average costing?

Answer: Average costing provides a middle ground solution for reporting net income and inventory.
Diff: 2 Type: ES
Skills: Recall
Blooms: Knowledge
16) When inventory prices are decreasing, what is the effect on Inventory, Cost of Goods Sold ,and Net Income
under the FIFO method?
Answer: FIFO results in the lowest ending inventory value, the highest Cost of Goods Sold, and the lowest Net
Income under decreasing prices.
Diff: 2 Type: ES
Blooms: Evaluation
17) When inventory costs are rising, what is the income statement effect if a company uses the average cost
method?
Answer: This will result in a higher cost of goods sold, a lower gross profit, and a lower net income.
Diff: 2 Type: ES
Blooms: Evaluation
6.4 Value inventory using the lower of cost or net realizable value rule
1) Under the conservatism principle, liabilities and expenses would be overstated, rather than understated.
Answer: TRUE
Diff: 1 Type: TF
LO: 6-4 Value inventory using the lower of cost or net realizable value rule
Skills: Recall
Blooms: Knowledge
16
2) The LCM rule compares original cost to current replacement cost to determine the amount at which
inventory should be valued.
Answer: TRUE
Diff: 1 Type: TF
Skills: Recall
Blooms: Knowledge
3) A material amount of value is one large enough to cause someone to change a decision that has been made.
Answer: TRUE
Diff: 1 Type: TF
Skills: Recall
Blooms: Knowledge
4) Changing from Average Cost to FIFO over two accounting periods could be viewed as a violation of what
accounting concept or principle?
A) Conservatism
B) Consistency
C) Materiality
D) Entity
E) Cost Principle
Answer: B
Diff: 2 Type: MC
Skills: Recall
Blooms: Knowledge
5) If a company has not recorded a significant write off of inventory in the financial statements, which principle
has been violated?
A) Conservatism
B) Consistency
C) Materiality
D) Entity
E) cost principle
Answer: C
Diff: 2 Type: MC
Skills: Concept
17
6) Making notes in the financial statements to explain the justification of valuation changes and other financial
decisions would be an example of:
A) conservatism.
B) consistency.
C) materiality.
D) full disclosure.
E) cost principle.
Answer: D
Diff: 2 Type: MC
Skills: Concept
7) What accounting principle would be followed when underestimating inventory?

Answer: conservatism
Diff: 2 Type: SA
Skills: Concept
8) When using the LCNRV rule, is the calculation of ending inventory applied to inventory on an item-by-item
basis or as a whole?
Answer: on an item-by-item basis
Diff: 2 Type: SA
Skills: Application
Blooms: Application
9) Assigning LCNRV to the items that make up the inventory of merchandise at the end of the accounting
period is an application of which accounting concept?
Answer: conservatism
Diff: 2 Type: SA
Skills: Application
Blooms: Application
10) One lot of merchandise was valued at $566.34. A second count of the same merchandise showed
$566.82. The difference could be ignored due to which accounting principle?
Answer: materiality
Diff: 2 Type: SA
Skills: Concept
Blooms: Knowledge
18
11) If the replacement cost of inventory is less than its historical cost, the company will write down the
inventory. What is the journal entry required?
Answer:
Debit Cost of Goods Sold
Credit Inventory
Diff: 2 Type: ES
Skills: Application
Blooms: Application
12) When is an item considered to be material?

Answer: An item is considered material when it is large enough to make a difference to a user of the financial
statements.
Diff: 2 Type: ES
Skills: Concept
Blooms: Knowledge
13) Meranda Company reports the following inventory information:
Inventory Number Inventory Quantity Unit Cost Unit Market Value

APD 3838 325 $56.78 $55.32
CPZ 1212 506 $92.31 $92.78
IXL 4039 817 $77.89 $79.31
EOD 3902 382 $19.38 $19.02
DKS 4823 626 $33.46 $30.74
What is the total value of the merchandise under LCNRV (lower of cost or net realizable value)? Show all
calculations.
Answer: The value of the inventory at LCNRV is $154,832.87
Calculation:
Each inventory item at the lower of cost or NRV:
(325 x 55.32) = 17,979
(506 x 92.31) = 46,708.86
(817 x 77.89) = 63,636.13
(382 x 19.02) = 7,265.64
(626 x 30.74) = 19,243.24
Total = $154,832.87
Diff: 2 Type: SA
Skills: Application
Blooms: Application
19
14) Nicola Company reports the following inventory information:
Inventory Number Inventory Quantity Unit Cost Unit Market Value

APD 4837 440 $51.29 $51.48
CPZ 2837 290 $76.59 $77.02
IXL 9291 310 $42.34 $42.47
EOD 1717 200 $22.19 $21.75
DKS 3088 180 $31.22 $31.17
What is the total value of the merchandise under LNRV M (lower of cost or net realizable value)? Show all
your calculations.
Answer: The inventory value at LCNRV is $67,864.70.
Calculation:
(440 x 51.29) = 22,567.60
(290 x 76.59) = 22,211.10
(310 x 42.34) = 13,125.40
(200 x 21.75) = 4,350
(180 x 31.17) = 5,610.60
67,864.70
Diff: 2 Type: ES
Skills: Application
Blooms: Application
6.5 Illustrate the reporting of inventory in the financial statements
1) An example of full disclosure would be a footnote to the financial statements indicating what method was
used to value inventory.
Answer: TRUE
Diff: 1 Type: TF
LO: 6-5 Illustrate the reporting of inventory in the financial statements
Skills: Application
Blooms: Application
2) Knowledgeable decisions that are made by outsiders who read financial reports are a result of the concept of
conservatism.
Answer: FALSE
Diff: 1 Type: TF
Skills: Concept
Blooms: Knowledge
20
3) Shrinkage refers to the loss of inventory due to theft, damage, or other similar occurrences.
Answer: TRUE
Diff: 1 Type: TF
Skills: Recall
Blooms: Knowledge
4) Which of the following is probably NOT used when taking a physical inventory?
A) Pre-numbered count sheets
B) Tags to show what inventory has been counted
C) Maps of the location of the inventory
D) Random counts of items
E) Prewritten inventory instructions
Answer: D
Diff: 1 Type: MC
Skills: Application
Blooms: Application
5) Which is usually NOT a common practice in taking a physical inventory?

A) Taking inventory during slow store hours
B) Hiring an outside firm
C) Taking inventory during the November and December holidays
D) Taking inventory in team of two persons
E) Having prewritten instructions
Answer: C
Diff: 2 Type: MC
Skills: Recall
Blooms: Evaluation
6) Which is NOT an assurance of footnote disclosures?

A) Conservative information
B) Reliable information
C) Comparable information
D) Relevant information
E) Materiality
Answer: A
Diff: 2 Type: MC
Skills: Recall
Blooms: Knowledge
21
7) Which of the following would probably NOT need to be disclosed in a footnote?

A) A change of inventory methods
B) A material change in estimated shrinkage
C) A change in depreciation method
D) A 10% increase in sales
E) The accounting policy used
Answer: D
Diff: 2 Type: MC
Skills: Application
Blooms: Application
8) Which of the following would probably NOT cause inventory shrinkage?

A) Employee theft
B) Spoilage of items
C) Spills of items
D) Correct counting of all inventory
E) Customer theft
Answer: D
Diff: 2 Type: MC
Skills: Application
Blooms: Application
9) Footnotes are used with what concept or principle of accounting?

Answer: Full disclosure
Diff: 2 Type: SA
Skills: Application
Blooms: Application
10) What is the term called that describes the decrease in inventory due to employee theft, customer theft,
and the damage, spillage, or spoilage of inventory items?
Answer: Inventory shrinkage
Diff: 2 Type: SA
Skills: Concept
Blooms: Knowledge
22
11) Which account would always be used for an inventory adjustment?

Answer: Cost of goods sold
Diff: 2 Type: SA
Skills: Recall
Blooms: Knowledge
12) If shrinkage is found for $500, what is the adjusting entry that would be required?
Answer: Debit Cost of Goods Sold $500; Credit Inventory $500
Diff: 2 Type: ES
Skills: Application
Blooms: Application
13) After a physical count, the ending inventory is adjusted. Where on the balance sheet is the ending inventory
shown?
Answer: As a current asset after accounts receivable
Diff: 2 Type: ES
Skills: Recall
Blooms: Knowledge
14) If the actual inventory count determines an inventory value of $350 while the perpetual inventory records
show a value of $339, what is the adjusting entry for the $11?
Answer: Debit Inventory $11; Credit Cost of Goods Sold $11
Diff: 2 Type: ES
Skills: Application
Blooms: Application
15) What are the two things about inventory that must be disclosed in the notes of the financial statements?
Answer: The inventory costing method and whether the company uses the LCNRV method
Diff: 2 Type: ES
Skills: Recall
Blooms: Knowledge
23
6.6 Determine the effect of inventory errors on the financial statements
1) The ending inventory of one year becomes the beginning inventory of the next year.
Answer: TRUE
Diff: 1 Type: TF
LO: 6-6 Determine the effect of inventory errors on the financial statements
Skills: Recall
Blooms: Knowledge
2) Counting inventory on December 31 that was shipped FOB shipping point would not cause any error in the
final inventory valuation.
Answer: TRUE
Diff: 1 Type: TF
Skills: Recall
Blooms: Knowledge
3) An error on inventory in one year does not have any effect on the inventory at the start of the next year.
Answer: FALSE
Diff: 1 Type: TF
Skills: Recall
Blooms: Knowledge
4) Inventory errors cancel out at the end of the________ accounting period(s).

A) 1st
B) 2nd
C) 3rd
D) 4th
E) 5th
Answer: B
Diff: 2 Type: MC
Skills: Recall
Blooms: Knowledge
24
5) Which of the following is an INCORRECT statement if ending inventory is overstated?

A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income is overstated.
D) Income tax is overstated.
E) Retained earnings is overstated.
Answer: A
Diff: 3 Type: MC
Skills: Application
Blooms: Application
6) Which of the following is an INCORRECT statement if ending inventory is understated?

A) Cost of goods sold is overstated.
B) Gross profit is overstated.
C) Net income understated.
D) Income tax is understated.
E) Retained earnings is understated.
Answer: B
Diff: 3 Type: MC
Skills: Application
Blooms: Application
7) Which of the following would NOT cause an error in the physical inventory count on December 31?
A) Counting inventory purchased that was shipped FOB destination on December 31
B) Double counting an aisle of product
C) Counting inventory purchased that was shipped FOB shipping point on December 31
D) Forgetting to tag a section of inventory
E) Forgetting to count an inventory item
Answer: C
Diff: 2 Type: MC
Blooms: Evaluation
25
8) An error in the reported inventory will cause errors in all of the following EXCEPT the:
A) balance sheet.
B) statement of retained earnings.
C) following year's financial statements.
D) cash account.
E) income statement.
Answer: D
Diff: 2 Type: MC
Skills: Recall
Blooms: Knowledge
9) If the ending inventory in Period 1 is understated, gross profit for Year 1 is __________.
Answer: understated
Diff: 2 Type: SA
Skills: Application
Blooms: Application
10) If a misstatement of inventory occurs, the net income for __________ periods will be misstated.
Answer: two
Diff: 2 Type: SA
Skills: Recall
Blooms: Knowledge
11) If ending inventory in Period 1 is overstated, gross profit in Period 2 is __________.

Answer: understated
Diff: 2 Type: SA
Skills: Application
Blooms: Application
12) If ending inventory in Period 1 is understated, cost of goods sold in Period 2 is __________.
Answer: understated
Diff: 2 Type: SA
Skills: Application
Blooms: Application
26
13) Assume that in Year 1, the ending merchandise inventory is overstated by $30,000. If this is
the only error in Years 1 and 2, fill in the items below, indicating which items will be understated, overstated,
or correctly stated for Years 1 and 2.
Item Year 1 Year 2

Ending inventory
Beginning inventory
Cost of goods sold
Answer:
Ending Inventory: Overstated, Correct
Beginning Inventory: Correct, Overstated
Cost of goods sold: Understated, Overstated
Diff: 3 Type: ES
Skills: Application
Blooms: Application
14) Assume that in Year 1, the ending merchandise inventory is overstated by $30,000. If this is the
only error in Years 1 and 2, fill in the items below, indicating which items will be understated, overstated, or
correctly stated for Years 1 and 2.
Item Year 1 Year 2

Gross Profit
Net Income
Ending Retained
Earnings
Answer:
Gross Profit: Overstated, Understated
Net income: Overstated, Understated
Ending Retained Earnings: Overstated, Correct
Diff: 3 Type: ES
Skills: Application
Blooms: Application
27
15) If Period 1 ending inventory is overstated, then what items are affected on the income statement? Indicate
whether the item would be understated or overstated.
Answer: Cost of goods sold is understated and net income is overstated in Period 1.
Diff: 2 Type: ES
Skills: Application
Blooms: Application
16) If Period 1 ending inventory is understated, then what items are affected on the income statement? Indicate
whether the item would be understated or overstated
Answer: Cost of goods sold is overstated and net income is understated in Period 1.
Diff: 2 Type: ES
Skills: Application
Blooms: Application
17) If gross profit is overstated in Period 1, then what is the effect on the ending inventory and net income in
Period 1?
Answer: Ending inventory is overstated, and net income is overstated.
Diff: 2 Type: ES
Skills: Application
Blooms: Application
18) If cost of goods sold was understated in Period 1, then what is the effect of cost of goods sold and gross
profit in Period 2?
Answer: Cost of goods sold is overstated and gross profit is understated.
Diff: 2 Type: ES
Skills: Application
Blooms: Application
6.7 Use the gross profit method to estimate ending inventory
1) If a company experiences a loss of inventory for fire, there is no way to estimate the inventory.
Answer: FALSE
Diff: 1 Type: TF
LO: 6-7 Use the gross profit method to estimate ending inventory
Skills: Recall
Blooms: Knowledge
28
2) The first step in using the gross profit method to estimate ending inventory is to:
A) calculate the cost of goods available for sale.
B) estimate the ending inventory.
C) estimate the beginning inventory.
D) estimate the cost of goods sold.
E) calculate net income.
Answer: A
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
3) The second step in using the gross profit method to estimate ending inventory is to:
A) estimate the cost of goods sold.
B) calculate the cost of goods available for sale.
C) estimate the ending inventory.
D) estimate the beginning inventory.
E) estimate net income.
Answer: A
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
4) The last step in using the gross profit method to estimate ending inventory is to:
A) estimate the beginning inventory.
B) estimate the cost of goods sold.
C) calculate the cost of goods available for sale.
D) estimate the ending inventory.
E) calculate net income.
Answer: D
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
29
5) Beginning inventory + Net purchases = ________.

A) Cost of goods sold
B) Cost of goods available for sale
C) Gross profit
D) Ending inventory
E) Sales revenue
Answer: B
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
6) Net sales times the historical gross profit percentage yields the estimated:
A) ending inventory.
B) beginning inventory.
C) gross profit.
D) cost of goods sold.
E) net income.
Answer: C
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
7) Net sales minus estimated gross profit yields the estimated __________.
Answer: cost of goods sold.
Diff: 1 Type: SA
Skills: Recall
Blooms: Knowledge
8) Cost of goods available for sale minus estimated cost of goods sold yields the estimated __________.
Answer: ending inventory
Diff: 1 Type: SA
Skills: Recall
Blooms: Knowledge
30
9) A company has $4,500 in net sales, $3,200 in gross profit, $1,300 in ending inventory, and $1,800 in
beginning inventory. What is the company's cost of goods sold?
Answer: $1,300
Diff: 2 Type: SA
Skills: Application
Blooms: Application
10) A company has $8,200 in net sales, $1,100 in gross profit, $2,500 in ending inventory, and $2,000 in
beginning inventory. What is the company's cost of goods sold?
Answer: $7,100
Diff: 2 Type: SA
Skills: Application
Blooms: Application
11) What is the method used to estimate the cost of ending inventory?
Answer: Gross profit method
Diff: 2 Type: SA
Skills: Recall
Blooms: Knowledge
12) The __________ estimates inventory by using the format for cost of goods sold.
Answer: gross profit method
Diff: 2 Type: SA
Skills: Recall
Blooms: Knowledge
31
13) Aqua Corporation has given you the following inventory figures:
Beginning Inventory $534,274 Freight/Shipping $11,382

Purchases of Inventory $1,356,493 Purchase Returns $7,302
Ending Inventory ? Net Sales $945,358
Historical Gross Profit
Percentage 38%
Using the gross profit method, calculate the estimated ending inventory to the nearest dollar. Show all
calculations.
Answer: $1,308,725
Calculation:
Goods available for sale:
($534,274 + $1,356,493 + $11,382 - 7,302 = $1,894,847)
Cost of goods sold: $945,358 - ($945,358 x 0.38) = $586,122
Estimated ending inventory: $1,894,847 - $586,122 = $1,308,725
Diff: 3 Type: ES
Skills: Application
Blooms: Application
14) Beta Corporation has given you the following inventory figures:

Purchases of Inventory $347,465 Purchase Returns $8,382
Percentage 44%
calculations.
Answer: $372,179
Calculation:
Goods available for sale: ($289,405 + 347,465 + 5,385 — 8,382 = $633,873)
Cost of goods sold: $467,311 - ($467,311 x .44) = $261,694
Estimated ending inventory: $633,873 - 261,694 = $372,179
Diff: 3 Type: ES
Skills: Application
Blooms: Application
32
15) Cobra Corporation has given you the following inventory figures:

Purchases of Inventory $264,834 Purchase Returns $5,802
Percentage 57%
calculations.
Answer: $268,709
Calculation:
Goods available for sale: ($175,699 + 264,834 + 3,073 — 5,802 = $437,804)
Cost of goods sold: $393,245 - ($393,245 x .57) = $169,095
Diff: 3 Type: ES
Skills: Application
Blooms: Application
16) Armedio Enterprises lost its entire inventory in a hurricane that occurred on March 31, 2014.
Over the past five years, gross profit has averaged 30% of net sales. The company’s records reveal the
following data for the month of March:
Beginning Inventory $42,600, Net Purchases $259,900, Sales $430,500, and

Sales Returns and Allowances $12,300
Estimate the inventory for the end of March using the gross profit method.
Answer: $9,760
Calculation:
Goods available for sale: ($42,600 + 259,900 = $302,500)
Cost of goods sold: $(430,500 - 12,300) x .70 = $292,740
Diff: 2 Type: ES
Skills: Application
Blooms: Application
33
6.8 Compute the inventory turnover rate
1) Inventory generates profit once it is stocked on the shelf.

Answer: FALSE
Diff: 1 Type: TF
LO: 6-8 Compute the inventory turnover rate
Skills: Recall
Blooms: Knowledge
2) Inventory turnover equals the cost of goods sold divided by ending inventory.
Answer: FALSE
Diff: 1 Type: TF
Skills: Recall
Blooms: Knowledge
3) Inventory turnover measures the number of times a company turns over its beginning inventory during a
period.
Answer: FALSE
Diff: 1 Type: TF
Skills: Recall
Blooms: Knowledge
4) Other than the cost of purchasing the inventory, another large cost of inventory would be storage of the
inventory.
Answer: TRUE
Diff: 1 Type: TF
Skills: Recall
Blooms: Knowledge
5) The inventory turnover rate is computed by:

A) dividing average inventory by cost of goods sold.
B) dividing cost of goods sold by average inventory.
C) dividing ending inventory by cost of goods sold.
D) dividing ending inventory by beginning inventory.
E) dividing beginning inventory by cost of goods sold.
Answer: B
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
34
6) Inventory is often the largest:

A) expense on the income statement.
B) long-term asset on the balance sheet.
C) current asset on the balance sheet.
D) part of general selling expenses.
E) property, plant, and equipment on the balance sheet.
Answer: C
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
7) The inventory turnover ratio is normally computed for:

A) a buying season.
B) the entire year.
C) each monthly accounting period.
D) each quarter.
E) every sixth months.
Answer: B
Diff: 1 Type: MC
Skills: Recall
Blooms: Knowledge
8) Customer demand for an item CANNOT:

A) increase the inventory turnover.
B) decrease the inventory turnover.
C) affect the amount of merchandise the company purchases.
D) directly impact cash on the balance sheet.
E) affect sales.
Answer: D
Diff: 2 Type: MC
Skills: Recall
Blooms: Knowledge
9) Goods available for sale are $85,000; beginning inventory is $27,000; ending inventory is $19,000; and cost
of goods sold is $63,500. What is the inventory turnover?
Answer: 2.76
Diff: 1 Type: SA
Skills: Application
Blooms: Application
35
10) Goods available for sale are $118,000; beginning inventory is $37,000; ending inventory is $42,000; and
cost of goods sold is $77,000. What is the inventory turnover?
Answer: 1.95
Diff: 1 Type: SA
Skills: Application
Blooms: Application
11) Goods available for sale are $350,000; beginning inventory is $24,000; ending inventory is $32,000; and
cost of goods sold is $275,000. The inventory turnover is __________.
Answer: 9.82
Diff: 1 Type: SA
Skills: Application
Blooms: Application
Answer: 1.00
Diff: 1 Type: SA
Skills: Application
Blooms: Application
of goods sold is $50,000. The inventory turnover is __________.
Answer: 2.78
Diff: 1 Type: SA
Skills: Application
Blooms: Application
Answer: 2.79
Diff: 1 Type: SA
Skills: Application
Blooms: Application
36
15) Gross profit is $40,000; beginning inventory is $16,000; ending inventory is $20,000; and sales are
$120,000. Calculate the inventory turnover and days in inventory.
Answer:
Inventory turnover = (120,000 - 40,000)/(16,000 + 20,000) / 2 = 80,000/18,000 = 4.44
Days in inventory = 365 / 4.44 = 82.21 days
Diff: 2 Type: ES
Skills: Application
Blooms: Application
16) 2012 ending inventory is $27,000; 2013 ending inventory is $19,000;2014 ending inventory is $21,000; and
cost of goods sold is $63,500 for 2014 and $65,900 for 2013. What is the inventory turnover for 2013 and
2014? Has the inventory turnover improved?
Answer:
2013: 65,900 / (27,000+19,000)/2 = 2.87
2014: 63,500 / (19,000 + 21,000)/2 = 3.18
The inventory turnover has improved from 2013.
Diff: 2 Type: SA
Skills: Application
Blooms: Application
17) 2012 ending inventory is $25,000; 2013 ending inventory is $19,500; 2014 ending inventory is $22,000;
and cost of goods sold is $65,500 for 2014 and $67,900 for 2013. What is the days in inventory for 2013 and
2014? Has it improved?
Answer:
2013: 67,900 / (25,000+19,500)/2 = 3.05; 365/3.05 = 120 days
2014: 65,500 / (19,500 + 22,000)/2 = 3.16; 365/3.16 =116 days
The days in inventory has improved from 2013.
Diff: 2 Type: ES
Skills: Application
Blooms: Application
18) If a company has an inventory turnover rate of 4, how often is the company selling its inventory in months?
Answer: The company sells its inventory approximately every three months.
Diff: 1 Type: ES
Skills: Application
Blooms: Application
37
19) Gross profit is $40,000; beginning inventory is $16,500; ending inventory is $20,800; and sales are
$120,000. The industry average has an inventory turnover of 4.8. How is the company doing with its inventory
management as compared to the industry?
Answer: Inventory turnover = (120,000 - 40,000) / (16,500 + 20,800) /2 = 4.29
Since the company's inventory turnover is less than the industry average, it is not managing its inventory as well
as the industry.
Diff: 2 Type: ES
Blooms: Analysis
20) What can a poor or declining inventory turnover tell you?

Answer: It may indicate that inventory may be damaged or obsolete.
Diff: 2 Type: SA
Skills: Application
Blooms: Application
6.9 Cumulative Questions
1) Journalize the following transactions for the next three independent situations.
Case 1
Gertrude Enterprises has determined that the replacement cost (current market value) of the December 31, 2014
ending inventory is $32,400.The inventory is recorded on the balance sheet at $33,500. What is the journal
entry using the lower of cost or net realizable value rule?
Case 2
Austin’s Jewellers carries a line of silver bracelets. Austin’s Jewellers uses the FIFO method and a perpetual
inventory system. The sales price of each bracelet is $105. Company records indicate the following activity for
the bracelets for the month of March: Purchases of 200 units on January 1 at a cost of $30 per unit and
purchases of 400 units on February 1 at a cost of $33 per unit. Sold 300 units on account on February 25.
Journalize the sale of 300 units.
Case 3
On January 2, 2014, Bright Lights purchased showroom fixtures for $10,000 cash, expecting the fixtures to
remain in service for five years. Bright Lights has depreciated the fixtures on a straight-line basis, with zero
residual value. On September 30, 2015, Bright Lights sold the fixtures for $5,000 cash. Record both
the depreciation expense on the fixtures for 2015 and the sale of the fixtures on September 30, 2015.
38
Answer:
Date Description P.R. Debit Credit
Case 1 Loss due to writedown of inventory 1,100
Inventory 1,100
Case 2 Cost of Goods Sold 9,300

Inventory 9,300
200 x $30 + 100 x $33
Accounts Receivable 31,500

Sales 31,500
$105 x 300
Case 3 Depreciation Expense 1,500

Accumulated Depreciation 1,500
10,000 / 5 years x 9/12
Cash 5,000
Accumulated Depreciation 3,500
Loss on Sale of Fixtures 1,500
Fixtures 10,000
Diff: 3 Type: ES
LO: 6-2, 6-4, 6-5
Skills: Application
Blooms: Application
CFALO: A-10 Measure and account for property, plant and, equipment
39

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Chapter 6 Test Item File Waybright/Chen/Pyper, Financial Accounting, Ce

Financial Accounting First Canadian Edition

6.1 Describe the three different inventory costing methods

2) Merchandising companies can be either wholesalers or retailers.

4) GAAP allows two different kinds of inventory costing methods.

8) An inventory layer is synonymous with a separate:

9) An accounting department only needs to know:

11) A manufacturer uses __________ inventory to produce the goods it sells.

13) What does a manufacturer's goods available for sell represent?

14) Which method of valuing inventory is based on the average of units?

1) Beginning inventory plus net purchases equals cost of goods sold.

2) A piece of artwork would probably be inventoried using the specific-identification method.

4) Cost of goods sold is shown on the:

5) Inventory is shown on the:

6) The amount of cost of goods sold is MOST influenced by the:

7) The LEAST widely used of the inventory valuation methods is:

8) Brandon Company has the following list of inventory:

Item Unit Cost Selling Price

Date Received Sold Cost/Unit Total Cost

Calculation: (3513.72 + 2901.10 + 2629.64)/(534 + 433 + 389)

10) Brandon Company has the following list of inventory:

Item Unit Cost Selling Price

Units Unit Price Total Cost

Units Unit Price Total Cost

Debit Cash $40; Credit Sales $40

Units Unit Price Total Cost

June 14 Accounts Payable $990

June 18 Accounts Payable $5,710

April 17 Purchased $4,800 of inventory, on account, terms 2/10, n/30.

April 22 Accounts Payable 750

April 25 Accounts Payable 4,050

6) Consistency is mandated by:

8) What is the most popular inventory costing method?

14) What are the benefits of using FIFO?

15) What are the benefits of using average costing?

7) What accounting principle would be followed when underestimating inventory?

12) When is an item considered to be material?

13) Meranda Company reports the following inventory information:

Inventory Number Inventory Quantity Unit Cost Unit Market Value

14) Nicola Company reports the following inventory information:

Inventory Number Inventory Quantity Unit Cost Unit Market Value

6.5 Illustrate the reporting of inventory in the financial statements

5) Which is usually NOT a common practice in taking a physical inventory?

6) Which is NOT an assurance of footnote disclosures?

7) Which of the following would probably NOT need to be disclosed in a footnote?

8) Which of the following would probably NOT cause inventory shrinkage?

9) Footnotes are used with what concept or principle of accounting?

11) Which account would always be used for an inventory adjustment?

6.6 Determine the effect of inventory errors on the financial statements

4) Inventory errors cancel out at the end of the________ accounting period(s).

5) Which of the following is an INCORRECT statement if ending inventory is overstated?

6) Which of the following is an INCORRECT statement if ending inventory is understated?

11) If ending inventory in Period 1 is overstated, gross profit in Period 2 is __________.

Item Year 1 Year 2

Item Year 1 Year 2

6.7 Use the gross profit method to estimate ending inventory

5) Beginning inventory + Net purchases = ________.

Beginning Inventory $534,274 Freight/Shipping $11,382

Beginning Inventory $289,405 Freight/Shipping $5,385

Beginning Inventory $175,699 Freight/Shipping $3,073

Beginning Inventory $42,600, Net Purchases $259,900, Sales $430,500, and

6.8 Compute the inventory turnover rate

1) Inventory generates profit once it is stocked on the shelf.

5) The inventory turnover rate is computed by: